A brief portfolio update and summary of our first six months of investing together.
US Financials are undervalued and under-appreciated. They trade at considerable discounts to the wider market despite the fact that they are seeing improved balance sheets and earnings growth. Life insurance/retirement solution companies are especially attractive right now as their services are in high demand. We like Voya Financial and Aegon. Voya is a David Einhorn favorite and was formally known as ING US. Aegon is based in Netherlands but about 70% of their earnings coming from the Americas.
Aegon is effectively an American financial company that trades at European price multiples. They trade with a price book ratio of .54, a price to sales ratio of .29, a forward P/E of 10.3 and a PEG ratio of .43. You would expect these metrics from an insurance company whose markets are experiencing a period of hardship. But this is not the case for Aegon’s largest market, North America. Even many of Aegon’s weaker markets are backed by the ECB, who are currently considering implementing asset purchases.
Voya is similarly attractive on a valuation basis. Despite the fact they have experienced consistent growth and earnings beats, they trade with a price to book ratio of .68, and price to sales ratio of .96 and a forward P/E of 11.62. It’s important to note that Voya is a retirement and investment management specialist, not just a life insurer.
US Financial stand to gain in a rising interest rate environment and rates have (seemingly) nowhere to go but up. Although the current environment is unprecedented in terms of deleveraging and Fed intervention, employment is improving and economic growth is appears to be on the horizon. It seems as if we are finally reaching a tipping point in credit growth. These valuations are simply too enticing to ignore and provide a likely catalyst for price appreciation in the coming year.
“People are always asking me where the outlook is good, but that is the wrong question. The right question is: Where is the outlook most miserable?” – John Templeton
* Heavy investment needed after China supply deal
* Putin suggests money could come from gold, forex reserves
* Calls for reduced reliance on foreign energy equipment (Adds quotes, background, details)
By Vladimir Soldatkin
ASTRAKHAN, Russia, June 4 (Reuters) – President Vladimir Putin said on Wednesday that Russia should consider recapitalising state gas company Gazprom after a $400 billion deal with China which will require multi-billion-dollar investments in pipelines and new fields.
“The government and finance ministry should consider the possibility of recapitalising Gazprom in the amount needed to build up new infrastructure,” Putin said at a meeting on energy strategy in the southern city of Astrakhan.
Boosting Gazprom’s capital would put additional pressure on the Russian economy, already slowing due to a lack of reforms and following Western sanctions on Russia over its annexation of Crimea, which have weighed on the rouble and triggered capital outflows.
Russian authorities have estimated that the 30-year China deal could add 0.3-0.4 percentage points to economic growth annually from 2015. The economy is likely to grow by around 0.5 percent this year, the central bank said.
The $400 billion deal, signed during a visit by Putin last month, secured a major source of supply for China, the world’s top energy user, and opened up a new market for Moscow, which risks losing European customers over the Ukraine crisis.
Russia plans to invest $55 billion in exploration and pipeline construction to China’s border, and China’s CNPC said it would build the Chinese section of the pipeline. A Gazprom executive said China would provide a $25 billion pre-payment.
Putin did not say how exactly Gazprom could be recapitalised but hinted it could be done from Russia’s gold and foreign exchange reserves.
“In the modern world, endless increases in gold and foreign exchange reserves hold some risks as well,” Putin said, adding that the Chinese contract was certain to recoup the investments in the long run.
Russia’s gold and foreign exchange reserves, the world’s fourth largest, stood at $468.4 billion as of last week, down almost $41 billion since the start of the year because of market volatility caused by the Ukraine crisis.
For now, Europe is Gazprom’s key export market. The continent gets a third of its gas needs from Moscow, and about half of this is pumped via Ukraine.
Moscow and Kiev are in the middle of their third gas row in a decade, which also threatens to disrupt supplies to Europe.
CALL TO CUT RELIANCE
Following the annexation of Crimea from Ukraine in March, the United States and European Union imposed sanctions on Moscow, spurring talk of a need to diversify the Russian economy, including its financial and energy sectors, away from the West.
Putin told the meeting Russia should reduce reliance on foreign equipment in the energy sector and step up efforts to exploit oil and gas in Siberia and Russia’s Far East, which borders China.
“Import substitution is not a panacea for all the problems but we understand that it may allow us to guarantee the implementation of many projects,” Putin said, adding that Russia would not halt imports altogether.
Russian energy companies have so far said that Western sanctions have not affected their cooperation with global energy majors such as ExxonMobil and Royal Dutch Shell .
Oil production in Russia, the world’s top crude producer, has fallen for five months running, highlighting the need to explore for unconventional resources and remote fields, where foreign know-how is most needed.
Gazprom Neft, Russia’s No.4 oil producer, has already said it may look to domestic or Asian suppliers for drilling rigs if needed.
Some companies admit there could be risks in borrowing abroad because of sanctions.
Igor Sechin, CEO of Russia’s state oil producer Rosneft , publicly acknowledged this for the first time on Wednesday when he told Putin the company faced potential risks both in borrowing abroad and implementing its foreign projects.
Sechin, although not Rosneft, is on the U.S. sanctions list as a close ally of Putin. (Reporting by Vladimir Soldatkin; Writing by Katya Golubkova; Editing by Mark Trevelyan)
“The ECB is widely expected to reduce interest rates on Thursday. Because its deposit rate is already at zero, this would include the unusual move of installing a negative rate on overnight bank deposits—effectively charging banks to park funds at the ECB. Central banks in Denmark and Sweden have experimented with negative deposit rates, with mixed results, but the ECB would be the largest to do so… At the same time the euro zone lacks deep markets for pooled bank loans. And amid persistent doubts about the health of European banks, particularly in the south, it is unlikely that ECB stimulus would find its way to household and business borrowing. For this reason, the ECB is unlikely to unveil major asset purchases Thursday, but it could keep the door open.”
- Is it possible that an asset purchase plan is priced into European equities? And will the absence of one disappoint the market? That’s our concern given our sizable exposure to European financials…
Ever wish you could go back in time and buy American banks before Fed QE?
Event driven strategies are seeking to profit on the employment of record corporate cash. With healthy valuations, low rates and very little volatility, event-driven strategies are especially lucrative in our current environment.